Dealing with late payment: A guide for SMEs |
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| Finance | |
| Written by David Morgan, CEO, Invu | |
| Friday, 20 February 2009 | |
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Reports indicate that more than half of SME businesses have experienced problems with delayed customer or supplier payments at some time. Late payment has always been a problem for SMEs, with reports stating that more than half of SME businesses have experienced problems with delayed customer or supplier payments at some time.
Remove the risk of taking on unreliable customers by running a credit check before they sign on the dotted line. If you knew a customer was about to go bust would you allow them 30 days credit? Of course not! Many organisations and independent bodies exist that can provide you with a status report for very little cost. Try Companies House, for example
Processing supplier invoices can be extremely time-consuming and expensive. In addition, delays in invoice processing can result in reduced supplier discounts, late payment penalties and duplicate payments. These inefficient financial processes will inevitably have negative effects on cash flow, so it is vital that you take steps to ensure your business avoids making its own late payments. When invoices are sent and received both electronically and on paper, tracking these documents is vital. Document management systems, such as Invu, will help you trace any invoice in case of dispute, or just when the time comes to chase payment.
If a customer disputes the invoice you have sent them, it can be a laborious process to cross-reference what was agreed at the point of sale with what was invoiced. This inevitably delays payment, but can be simply avoided by implementing a document management system that allows you to instantly search and call up any document, so that any dispute can be cleared up within a matter of minutes.
Tell your customers that you must be paid via bank transfer rather than by cheque. If you are paid electronically, then funds will be cleared and accessible for use on the same day that they're received. This removes the lost time waiting for cheques to clear and you will earn interest straight away. Being paid electronically also negates the old ‘the cheque is in to post’ excuse helping your credit control. In addition, transactions made using BACS Direct Credit cost significantly less to process than a cheque payment, saving you more money.
Don’t be afraid to chase late payments early - as long as you are polite, then a quick email or phone call can often pre-empt payment problems. This will also most likely help you build up a good relationship with your customers’ accounts departments.
Getting to know your customers well means that you will be aware of any reasons for the late payment. You will then be able to make a considered judgement as to whether it is worth upsetting a regular customer who, for example, has fallen a few days behind on a payment for the first time. However, if you find a usually punctual payer begins to fall behind on payments regularly, this could be an indication of financial difficulties for their business and you can begin to take the necessary steps to avoid this impacting your own business.
If you regularly have problems with late payments, try offering an early payment discount, or a discount for upfront payment of several instalments. This is likely to encourage your customers to pay early, although your margins will be more squeezed, so remember to set your pricing accordingly to accommodate this.
Make it clear to customers that they will be charged interest on late payments. You are legally entitled to do so, and interest often provides the necessary push for your customers to pick up their pace. After all, they are trying to cut costs just as much as you are. Check out the Late Payment Legislation for your full legal rights at www.late-payment-law.co.uk
Ensure that you know what the impact of a late payment would be ahead of it actually happening. This means that should the worst happen, you will already have a plan in place as to how to deal with it, as well as what the longer term implications will be for your cash flow going forward. In extreme circumstances, late payment can have catastrophic consequences for SMEs – research shows that close to one in 20 entrepreneurs claim late payment has almost caused their business to fold. By drawing up cash flow forecasts, you can identify any funding gaps early and develop a plan of action.
For many businesses, the majority of their income could come from just one client or customer. This means that should they decide to delay payment to you for whatever reason, you will be left with serious cash flow issues. From the outset, try and establish your business model so that a single customer amounts to no more than 25 per cent of your annual turnover.
If you do become embroiled in a dispute over a late payment, the onus is on your company to resolve it. Write to your debtor in the first instance to bring attention to the outstanding payment, and then follow it up with a call.
Make sure that you have systems in place to ensure that your own invoices are paid efficiently. Not only will this save you money with early payment discounts, and no interest charges, but it will also establish your company’s good reputation within the industry. This will give you a good credit record; vital for negotiating good deals for yourself. Once you have established your own exemplary record, word will eventually get around. If all businesses use the tools at hand to settle accounts quickly and efficiently, the economy as a whole will feel the benefit with positive spin-offs all round. Comments (1)
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The cost of processing a cheque is around ten times that of an EFT, with longer clearing times at the bank making a late payment even later and causing cash flow issues for both parties concerned.
Electronic payments save so much time and resource – it’s difficult to understand why any SME would choose to receive cheque payments. Investing in simple software allows businesses to set up secure, validated EFTs. Business owners can take control of when they are paid; they don’t need to rely on customers to pay on time because the software does it for them. Who can afford to spend 38 days a year just chasing late payments of £30,000 when overdue invoices of just £20,000 can cause bankruptcy?
This is the twenty-first century and yet the Bacs research shows astonishing numbers of SME owners are still entrenched in using unnecessary, archaic processes that could cost them their businesses.